The Price Of Earthquake Catastrophe Bond Based On Extreme Value Theory

In recent years, earthquakes, tsunamis and other largely natural disasters occurred frequently. Catastrophe events cause unpredicted losses to the state and the public, especially in our country which lacks of contingency reserves,has poor infrastructure and low insurance density. The disaster of’5.12"Wen Chuan earthquake had caused approximately1trillion losses,insurance only afford the compensation of1.66billion,and the short of losses was compensated basically by the government. In order to resolve the problem by market, pan xilong has present the method of issuing Catastrophe Compensation Fund which can concentrate social forces,this paper is a part of the issue.Though the probability of the occurrence of extreme risk is very low, the occurrence will definitely cause great damage, and the damage is often disastrous. The earthquake just have the characteristic of extreme event, so we can use the extreme value theory(EVT) which is used to research extreme event to research the earthquake. You may know EVT has two common model, BMM and POT. Generally, we use Generalized Extreme Value(GEV) describing the BMM model and use Generalized Pareto Distribution(GPD) describing the POT model. The two model can provide us the probability of the occurrence of disastrous huge earthquake, after we acquire the probability, it’s a easy thing to obtain the price of Earthquake Catastrophe Bond.